On June 18, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Zimbabwe.

In July 2013, Zimbabwe held its first general elections under the new constitution approved by referendum in March 2013 and ended the four-year coalition government. The new government has expressed its commitment to continue implementing the policies and reforms agreed with the Fund under the staff-monitored program (SMP) and to stay engaged with the international financial institutions. To achieve sustainable development and social equity, the government has launched a new five-year development plan, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET).

The economic rebound experienced since the end of hyperinflation in 2009 has ended. After averaging 10 percent from 2009-2012, growth fell to an estimated 3.3 percent in 2013, reflecting tight liquidity conditions, election-year uncertainty, weak demand for key exports, competitiveness pressures, and the impact of adverse weather. Inflation continued its downward trend from 2.9 percent (year-on-year) at end-2012 to -0.3 percent in April 2014, mainly reflecting the appreciation of the US dollar against the South African rand and weak domestic demand.

Zimbabwe’s external position remains precarious, with usable international reserves covering less than two weeks of imports. The current account deficit widened to 28.7 percent of GDP in 2013, as the trade deficit deteriorated, reflecting lower mineral exports. The main financing item in the capital account was private loans.

Financial sector vulnerabilities persist, stemming from the high levels of nonperforming loans (16.6 percent on average for banks in March 2014), low capitalization and low liquidity, with wide differentiation across banks. The banking sector experienced liquidity crunches in 2013, amid political and policy uncertainty. Deposits have been slowly returning to the banking system, but liquidity conditions remain tight. The Reserve Bank of Zimbabwe (RBZ) has taken steps to enhance the legal and regulatory framework. In January 2014 banks were instructed to immediately end new insider lending, and their boards are now required to ensure adequate provisioning and submit regular reports. In addition, the deadline for meeting the minimum capital requirement of US$100 million was extended to December 2020. Banks are required to submit their recapitalization plans by end-June 2014, with interim milestones to ensure compliance with the US$100 million requirement by December 2020. The authorities, with assistance from Afreximbank, are taking steps to revitalize the interbank market. They have also started to recapitalize the RBZ to allow it to resume some of its core functions.

Election-related spending and the public sector wage bill were the main factors behind expenditure overruns in 2013. Despite taking several tax and nontax revenue measures to fund election expenses, total revenue fell short of budgeted amounts, with an exceptionally low performance in the fourth quarter, reflecting weak economic activity and tight liquidity conditions. As a result, the budget deficit reached 2.2 percent of GDP in 2013. Fiscal pressures continued into 2014, with the budget targets in doubt in the context of sluggish growth and a 14- percent increase in the wage bill relative to 2013. To offset these pressures, the government has identified various revenue and expenditure measures valued at some 4.6 percent of GDP in 2014. If fully implemented, these measures could result in a reduction in the 2014 budget deficit to 0.6 percent of GDP, consistent with the available financing.

The SMP provided a useful anchor for Zimbabwe in a difficult election year. However, progress in implementing the SMP approved by Fund management in June 2013 and extended through June 2014 has been mixed, reflecting in part a long electoral process and a protracted post-election transition. Discussions of the first and second reviews under the SMP are nearing conclusion. The Zimbabwean authorities have indicated interest in a successor SMP to build on their achievements and to support a stronger policy framework.

The medium-term outlook, under the baseline scenario, is for growth to average some 4 percent, as large mining sector investments reach full capacity. The current account deficit is expected to improve but will remain high, averaging 15 percent of GDP. In addition, planned fiscal consolidation should facilitate a modest rebuilding of fiscal and external buffers, including international reserves. Zimbabwe faces serious medium-term challenges and achieving sustainable, inclusive growth will require strong macroeconomic and financial policies, an enabling business environment, and normalized relations with creditors.

The main near-term risks relate to further fiscal underperformance and uncertainty in the external environment that could see lower commodity prices, particularly for key mineral exports. Other risks relate to policy inconsistencies that could affect investment and financial sector vulnerabilities—specifically, liquidity shortages and disorderly unwinding of troubled banks.

Executive Directors noted Zimbabwe’s fragile economic situation characterized by a growth slowdown, a large external deficit, and low international reserves. With risks on the downside, they highlighted the need to restore fiscal and external sustainability and reduce financial vulnerabilities. They emphasized that achieving sustainable and inclusive growth requires determined and comprehensive reforms. In this regard, they welcomed the authorities’ renewed commitment to implementing the staff-monitored program, which has provided a useful anchor for policies during the past year notwithstanding policy delays.

Directors encouraged the authorities to fully implement their revised fiscal plan for 2014 and be ready to take additional actions if needed, while protecting priority infrastructure and social spending. They highlighted the need to mobilize revenue, including from the diamond sector. Directors also stressed the importance of rebalancing the expenditure mix away from employment costs in order to free up resources for development. Strengthening public financial management is also crucial to prevent accumulation of new arrears.

Directors expressed concern that Zimbabwe’s external position remains precarious. They welcomed the authorities’ commitment to rebuild external buffers. They underscored the need to improve debt management and supported the strategy to seek mainly grants and highly concessional resources, while limiting non-concessional financing to critical development projects with high economic returns. They noted that strong macroeconomic policies and a comprehensive arrears clearance framework supported by development partners are essential to addressing Zimbabwe’s debt problems. They encouraged the authorities to engage in coordinated discussions with the World Bank and other international financial institutions (IFIs) and called on them to respect the preferred creditor status of IFIs, avoid selective debt service, and increase payments to the Fund’s Poverty Reduction and Growth Trust as capacity to repay improves.

Directors stressed that enhancing financial sector stability remains a priority. They recommended continued vigilance in monitoring weak banks and a proactive approach to ensure an orderly resolution of insolvent non-systemic banks. They noted that restructuring and recapitalizing the Reserve Bank of Zimbabwe would help mitigate vulnerabilities. Directors supported the authorities’ plans to preserve the multicurrency system for the time being.

Directors took note of the staff’s assessment that the real exchange rate is overvalued. They underscored the importance of addressing structural bottlenecks to boost competitiveness and promote a sustainable external position, and highlighted the need to improve the business environment and basic infrastructure. Directors also saw a need to reduce uncertainty regarding the indigenization policy, including in the financial sector, to avoid deterring investment. Directors urged the authorities to fully implement the recent measures to boost transparency in the diamond sector and to modernize mining legislation.

Zimbabwe: Selected Economic Indicators, 2011–14

Actual

Est.

Proj.

2011

2012

2013

2014

Real GDP growth (annual percentage change) 1/

11.9

10.6

3.3

3.1

Nominal GDP (US$ millions) 2/

10,956

12,472

12,974

13,483

GDP deflator (annual percentage change)

3.7

3.0

0.7

0.8

Inflation (annual percentage change)

Consumer price inflation (annual average)

3.5

3.7

1.6

0.3

Consumer price inflation (end-of-period)

4.9

2.9

0.3

1.2

Central government (percent of GDP) 2/

Revenue and grants

26.7

28.0

28.8

29.8

Expenditure and net lending

29.0

29.3

31.4

31.9

Of which: cash expenditure and net lending

27.1

28.6

31.0

30.4

Of which: employment costs (incl. grants & transfers)

16.7

20.1

21.3

23.4

Overall balance (commitment basis)

-2.4

-1.3

-2.5

-2.2

Overall balance (cash basis)

-0.5

-0.6

-2.2

-0.6

Primary balance (cash basis)

-0.2

-0.4

-2.0

-0.3

Money and credit (US$ millions)

Broad money (M3)

3,100

3,694

3,888

4,011

Net foreign assets

-290

-435

-809

-744

Net domestic assets

3,391

4,129

4,697

4,754

Domestic credit (net)

2,754

3,559

3,993

3,993

Of which: credit to the private sector

2,711

3,524

3,618

3,551

Reserve money

123

273

272

280

Velocity (M3)

3.5

3.4

3.3

3.4

Balance of payments (US$ millions; unless otherwise indicated)

Merchandise exports 3/

4,421

3,808

3,572

3,812

Value growth (annual percentage change) 3/

36.1

-13.9

-6.2

6.7

Merchandise imports 3/

-7,562

-6,710

-6,952

-7,105

Value growth (annual percentage change) 3/

46.5

-11.3

3.6

2.2

Current account balance (excluding official transfers)

-3,269

-3,048

-3,613

-3,796

(percent of GDP) 2/

-29.8

-24.4

-27.8

-28.2

Overall balance 4/

123

-184

-244

-676

Official reserves (end-of-period)

Usable international reserves (US$ millions)5/

366

398

284

464

(months of imports of goods and services)

0.5

0.6

0.4

0.7

Debt (end-of-period)

Total external debt (US$ millions, e.o.p.) 6/ 7/ 8/

8,207

9,031

10,632

12,700

Percent of GDP 2/

74.9

72.4

81.9

94.2

PPG external debt (US$ millions, e.o.p.) 6/

6,243

6,680

6,834

7,101

Percent of GDP 2/

57.0

53.6

52.7

52.7

Of which: Arrears

5,076

5,286

5,420

5,575

Percent of GDP 2/

46.3

42.4

41.8

41.3

Other external debt (US$ millions, e.o.p.) 6/ 7/ 8/

1,964

2,351

3,798

5,599

Percent of GDP 2/

17.9

18.8

29.3

41.5

Sources: Zimbabwean authorities; IMF staff estimates and projections.

1/ At constant 2009 prices.

2/ Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

3/ Structural break in trade data in 2010. Trade data based on information from exchange control data in 2009 and customs data starting in 2010.

4/ Includes errors and omissions through 2012.

5/ Defined as the higher of Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks' current/RTGS accounts and statutory reserves, and amounts in SDR escrow account.

6/ Includes arrears.

7/ Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities' external debt reconciliation exercise concluded in January 2013.

8/ The revisions are due to new information provided by the authorities about their previous projections of withdrawn amounts

from approved foreign banks’ overdrafts.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.